Developing Mining Supply Chains: Making strategic use of local content policies

Guest blog for the IGF by Kojo Busia and Isabelle Ramdoo, African Minerals Development Centre

Governments are facing mounting pressures from their constituencies to leverage the mining sector for broader diversification. The lack of strong and competitive mining supply chains is probably one of the main weaknesses of resource-rich developing countries. Effective local content policies are part of the solution.

Local content policiescan unlock procurement opportunities for domestic firms and create ripple value-creating effects in the economy through other indirect business and employment opportunities.

Experiences from countries likeChile,AustraliaorCanadashow that strategic and well-designed policies and incentives to encourage local content can work, not only in supporting local supply chains to meet the needs of the mining industry but also in breeding internationally competitive industries.Blatant failuresin countries that used strict rules as sticks to force mining firms to abide by certain unrealistic requirements serve as cautionary tales. Simply drafting new rules will not make systemic challenges—or the frustration of the population—disappear.

The IGF is developing guidance for governments seeking to design effective local content policies. A draft will be presented at the Mining Indaba conference in Cape Town, South Africa, on February 6, 2018.

The guidance document will provide a thorough scan of the various dimensions of local content policies as well as a framework and step-by-step decision tree to help policy-makers identify the type of instruments that best suit their objectives. The guidance fills a major gap in the implementation of local content policies: reconciling objectives and instruments.

What does it take to make mining supply chains work?

The success or failure of local content policies as a stimulus for the development of strong supply chains is determined by the way in which policy-makers and business actors are able to work together to design, implement and monitor supportive instruments. Those instruments can be rules or incentives or can take “softer” forms such as partnerships and tacit agreements. Importantly, the effectiveness of local content policies is conditional on fundamental pre-requisites and the extent to which there is sufficient space for flexibility in case results are not up to expectations.

First, it is important to have consensus on the long-term vision and define clear objectives, responsibilities and measurable targets accordingly. Often times, policy design is guided by short-term electoral cycles. Firms’ sourcing decisions are defined by competitiveness and profitability considerations. Those objectives are not always reconcilable, and, therefore, diverging interests on both sides may render policies totally inapplicable and ineffective. Consensus therefore means finding common ground about what is “strategic” and agreeing on mutually beneficial solutions.

Second, governments must have a profound knowledge of mining supply chains and a deep understanding of market opportunities for mining-related goods and services, nationally, regionally and globally. Blanket policies are a recipe for failure.

Third, the infrastructure, institutions and business environment must be substantially improved. Many countries offer more red tape than red carpets to businesses, raising the cost of doing business and affecting productivity. Incentive-based local content policies can be used to facilitate the business and investment climate in support of mining supply chains.

Fourth, industrial capabilities must be scaled up. In many countries, the capacity of the domestic industry is very weak and the economic base is under-diversified. Under these conditions, it is almost impossible for the domestic private sector to compete with global players. Targeted support to domestic firms can help consolidate the industrial base for more sustainable supply chains.

Last but not least, the quality of human resources is a critical factor in establishing solid mining supply chains. Knowledge is one of the key drivers of productivity, and local content policies can be used to support capacity=building and training efforts.

A case of good practice: Ghana sets up a national supply chain development program

Ghana is Africa’s second largest gold producer and ranks ninth on the international scene. While gold has been a key contributor to national income, this has been largely a result of taxes and royalties; the potential of industrial linkages have remained largely underexploited.Ghanahas deployed a number of initiatives, including thepassing of the Minerals and Mining Law in 2006 and a local content ..., with the clear aim to “increase the local purchase of goods and services, the participation of local businesses and employment of local labour, at various levels of competencies.” The local content regulation includes, among others, a list of products to be sourced locally.

Successive assessments of Ghana’s local content regulation reveal that, while marked progress has been made in sourcing certain products from domestic industries, there are still weaknesses in finding reliable local suppliers for a range of products. In short, while the local content policy may have connected local suppliers with the mining industry, it was not sufficient on its own to make a true difference in the economic landscape.

The country launched aNational Suppliers’ Development Programme (NSDP)in November 2017. The program is based on consultations and partnerships across a range of stakeholders. It will provide dedicated and informed support to suppliers and will empower the local workforce with the necessary skills and competencies.

Although recently launched, the program has gained a lot of traction with the business community for providing the necessary institutional framework and technical support to connect local industries to the mining sector. There is hope it will serve as a conduit to initiate broader industrial development.